I mentioned Halkbank, or Halk Bankasi AS (its full Turkish name) about two years ago as a major threat to Erdogan's political survival. It played a key role in the biggest sanctions-evasion scheme in recent memory.
Reza Zarrab, a dual Iranian-Turkish citizen helped Iran sell its oil and gas and buy goods by creating an alternative to the SWIFT network through Halk Bankasi.
It was a complicated setup.
Tehran then decided to use a bypass system based on Turkey’s Halkbank. SWIFT was sidelined first by setting up front companies in China. Money was sent to the Chinese bank accounts of these companies from Iran as if they were reimbursements for exports. That money was instantly transferred to front or real companies in Turkey, also as export reimbursements. Gold bought with that money was moved to Iran via Dubai.According to the Foundation for Defense of Democracies (FDD), this "massive "gas-for-gold" sanctions-busting scheme yielded neighboring Iran some $13 billion in Turkish gold between 2012 and 2013."
In fact, this was just the tip of the iceberg as the FDD estimates that the actual sums were much higher.
The more we investigated, the more we realized that Zarrab’s schemes, which could have helped Iran pocket more than $100 billion, rank among the largest sanctions evasion episode in modern history.Since the sanctions were designed to hamper Iran's nuclear program, you can imagine where at least some of that money went.
Zarrab took his family to Disneyland in March 2016 and was promptly arrested by the American authorities and indicted by Preet Bharara, the then US Attorney for the Southern District of New York.
After a long trial with many ups and downs, former Halkbank deputy general manager Hakan Atilla was found guilty on 3 January 2018 (along with two Turkish ministers who were charged in absentia) and he is awaiting sentencing. While the prosecution is asking 20 years, the judge postponed sentencing twice so far. It has just been reported that the sentence will be announced on Wednesday 16 May.
What is more interesting for our purposes is the fine that the Treasury Department's Office of Foreign Assets Control (OFAC) is likely to impose to Halkbank and perhaps six other Turkish banks.
Turkish analysts and markets initially appeared optimistic about the size of the fine. But people who are familiar with the BNP Paribas (BNP) believe that Turkey is in for a big surprise.
In a decision made in May 2015, a U.S. court imposed a penalty of $8.9 billion against BNP, including $8.8 billion that it said was equal to the amount of transactions identified as criminal. The agreement with BNP was conditional on it accepting full responsibility for the crime and convincing U.S. authorities that it would set mechanisms in place to ensure full compliance with the sanctions regime in the future.Remember that the amount BNP was accused of laundering was $10.3 billion.
The fact remains that Halkbank has laundered at least four (4) times more money than BNPP. In addition, a former top level U.S. Treasury official testified at Mr. Atilla’s trial that U.S. officials had warned Mr. Atilla and other Halkbank executives not to violate U.S. sanctions on a few occasions. Moreover, Halkbank has had the benefit of BNPP’s example as a test case for what happens when banks violate sanctions regimes. As a result, any fine imposed upon Halkbank will likely exceed that of BNPP’s and any settlement will likely contain stricter and more rigid measures.I got curious and called a friend of mine who is in senior management at BNP and put the question to him. He said that the BNP analysts believe that the fine will be between $30 billion and $100 billion.
I asked if their people could be mistaken as these are huge sums and they would certainly bring Turkey to its knees. His response was that, is OFAC followed the same guidelines, there is no way they can impose a fine less than $30 billion.
He also added that they might postpone the decision until after the upcoming Turkish elections on 24 June. He was implying that the results might determine the size of the fine.
What should be worrisome for Turkish companies is the fact that such fines are always accompanied with an admission of wrongdoing and we know that Turkey's bombastic president will never agree to issuing such statement.
And without one, Washington could designate Halkbank on OFAC's sanction list.
This designation would effectively cut off the bank’s access to the U.S. market. Since Halkbank is the largest listed bank in Turkey, such a designation could have serious repercussions not just for the bank, but for Turkey at large.That would remove Halkbank's ability to do business in dollars. And that is a kiss of death for any bank.
Moreover, if the fine was very high and targeted the other six banks named, the economic repercussions would be very serious.
The evaporation of credit would bring household consumption and fixed capital formation growth downward significantly, subsequently bringing headline GDP growth down by about 1 percentage point compared with current projections. Depreciation of the lira would be more prolonged, the stabilization of which would deplete foreign currency reserves to dangerously low levels. The sharp weakening of the lira and concurrent drop in reserves would severely undermine the country's ability to meet external debt obligations. Net portfolio capital flows could be outward for several months, raising the likelihood of a current-account crisis. With markets unstable, inflation would spike.Originally, the OFAC decision was scheduled for 17 May (I can't find the link but I know I read it somewhere). If my friend at BNP is correct, we will see it postponed until after 24 June.
But if it is announced before the elections and it is substantial then we can assume that Turkey is no longer useful for the longer term American regional plans.
The sentence came in as reported and it is just two years and eight months. Judge Berman was lenient:
Prosecutors had asked for at least 15 years in prison for Mr Atilla, 47, citing the seriousness of the crimes and the need to deter similar offences.
But US District Judge Richard Berman said that the Halkbank executive appeared to have been “following orders” from the bank’s chief executive, Suleyman Aslan, who is one of several suspects wanted in the US in connection with the case, along with Zafer Caglayan, a former minister of the economy.
“Mr Atilla was something of a cog in the wheel and, I would add, at times a reluctant one at that,” he said, arguing that he deserved a “lenient” sentence because of his minor role and otherwise “exemplary” life.But analysts believe that (a) the fine will come after the elections on June 24 and (b) it will be large enough to cause major disruption.
We'll see in due course.